What Is Time?

PPLI Stops Time

 This week we will learn how a sophisticated structuring technique for wealthy international families, Private Placement Life Insurance (PPLI), has the ability to stop time. Yes, this may seem at first hearing outrageous, but from a tax and privacy perspective, this will be the conclusion of our article.

If PPLI has this ability, we must first define time. A tall order, you say. Let us look at a few quotes from William Shakespeare to get our bearings.

“Make use of time, let not advantage slip.”

“Let every man be master of his time.”

“I wasted time, and now doth time waste me.”

From these three quotes, we read that one element of time is scarcity: you only have so much of it.  And through your use of time, it is possible to place your affairs in more favorable circumstances.

What happens when assets are placed in a properly structured PPLI policy? These assets enter a privacy enhanced and tax-free environment. If this structure is properly maintained, from the time the policy is issued until the death of the last person insured under the PPLI policy, the assets are not subject to tax and receive enhanced privacy.  As far as tax laws are concerned TIME HAS STOPPED.

PPLI and Tax Law

 Let us leave the realm of poetry and re-enter the domain of tax concepts.  One element of tax law that is germane to time is the concept of constructive receipt. 

According to Investopedia, “Constructive receipt is a tax term mandating that an individual or business must pay taxes on income despite the fact that it has not been physically received. An individual is considered to be in constructive receipt of income when they have the ability to control or utilize the funds, even if they do not have direct possession of them, or if it is guaranteed they will have the ability to draw upon the funds in the future. A business is said to be in constructive receipt if the business has the ability to use the money without restriction or if it has been deposited into the business’ account. Constructive receipt of income prevents taxpayers from deferring tax on income or compensation they have not yet utilized or spent.”

The concept of constructive receipt is no longer applicable to a properly structured PPLI policy, because the assets have been reconstituted inside an insurance policy. The insurance company is now the beneficial owner of these assets for reporting purposes. When a family wishes to receive funds from the policy, they are distributions from the PPLI policy, and only charged a small fee, most usually around 25 basis points.

Again, the laws usually applicable to the assets inside the policy no longer apply. TIME HAS STOPPED.

Our firm gladly welcomes your structuring challenges, questions, and comments. We wish to participate in your quest to, as Shakespeare says, “Make use of time, let not advantage slip.”

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~ by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

 

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What Is Money?

Fungibility Is Key to PPLI

At the center of a Private Placement Life Insurance (PPLI) structure is fungibility. For PPLI this means in essence taking assets in a taxable environment into one that is tax-free. According to the Merriam-Webster dictionary, fungibility derives from the Latin verb fungi meaning “to perform (no relation to the noun “fungus” or the plural “fungi.”)

If something is fungible it is mutually exchangeable like an ounce of gold, or in other circumstances, as we will read further on in our article, the U.S. dollar held in the form of $100 bills.

This mutual exchange for a taxable environment for one that is tax-free is accomplished in PPLI by using life insurance. Perhaps a fungible transaction is not quite the right analogy.

Life insurance in the structure functions more like a membrane, where once the assets are properly structured inside the PPLI policy, the assets become recharacterized into a solution that has both outstanding tax benefits as well as enhanced privacy. Clients also can permeate this membrane for tax-free distributions on the income from the assets.

Worldwide life insurance has a tax-favored status, and this exchange from taxable to non-taxable can be accomplished with the creation of a PPLI structure that takes into account these key elements in a wealthy family’s situation:

  • Nationality of the family members;
  • Country of residence(s);
  • Location and type of assets;
  • Laws pertaining to trusts, life insurance, and other entities to be used;
  • Aims and goals of planning.

Once these elements are researched and analyzed, a tailor-made structure can be created for the family.  Wealthy international families are drawn to PPLI structures, in part, because of the legitimate enhanced privacy that can be accomplish inside this structure.

Governments and their tax authorities are in place, in the highest form, to secure the public good through the collection of taxes. Their citizens also have rights to privacy and, within the realm of law, to protect their private property from harm. Therefore, there is a built-in tension between these two aims.

Another built-in tension can occur in the financial world.  What happens when a country’s institutions don’t support a traditional banking system? One occurrence is that new systems are created to support the unique circumstances.  Let us take the extreme example of Somaliland.

For this example teaches us one of the underlying properties of what we call money: a means to facilitate a transaction. We are thankful to Matina Stevis-Gridneff in a recent Wall Street Journal article for these excerpts.

“An Isolated Country Runs on Mobile Money”

 

“HARGEISA, Somaliland—Hyperinflation and economic isolation have pushed this poor, breakaway republic closer to a virtual milestone than most other countries in the world: a cashless economy.

The continent, home to many of the world’s frontier economies, has come closest to skipping, or “leapfrogging” as it’s often called, traditional brick-and-mortar banks and going straight to heavily using phones as wallets.

And nowhere are the benefits of mobile money more apparent than in Somaliland, where the extreme economic and financial conditions have allowed Zaad, a service from the main local telecom, Telesom, to catalyze commerce in one of the most isolated parts of the world.

Once a week, Abdulahi Abdirahman hauls two bulky, heavy sacks of shillings from his gas station across Hargeisa to the money-exchange area downtown and, several hours later, returns with just a few dollar notes in his back pocket and his Zaad wallet loaded up.

Clients pay Mr. Abdirahman in Somaliland shillings. He needs to pay suppliers in dollars. Using Zaad, he gets half the payments in mobile money, meaning the cumbersome ritual has become more manageable in these times of high inflation.”

Money in Action Using PPLI

Now, again courtesy of The Wall Street Journal, by Joe Craven McGinty, we find another example of how money works in the real world.

“Cash Flow or Cash Stash? How Money Moves Around”

 

A record level of U.S. cash is circulating, but Americans aren’t spending the bulk of it.

So, where’s the money?

Up to two-thirds—or as much as $1.07 trillion—is held abroad. About $80 billion is held domestically by depository institutions. And the rest—as little as $453 billion—is in the hands of domestic businesses and individuals.

Last year, according to figures published by the Fed, $1.6 trillion was in circulation, including $1.3 trillion in $100 bills, or 80% of the total. In 1997, $458 billion circulated, including $291 billion in $100s, or 64% of the total.

The circulating currency held abroad could range from one-half to two-thirds of the total, the Fed estimates, or a range of $800 billion to $1.07 trillion.

Wealthy families worldwide have the option of creating their own unique structures using PPLI. These structures can become, in effect, private banks. By uniting PPLI with family assets and a bespoke banking relationship, much is achieved that cannot be accomplish in any other way. Please let us know how we can assist you in this endeavor. We welcome your questions and comments.

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  ~ by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

 

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The Art of War in Action

Achieve Stealth Victory with PPLI

Private Placement Life Insurance (PPLI) allows you to achieve levels of legitimate privacy not possible with solely planning with trusts. The PPLI policy works in harmony with a trust to create an environment of enhanced privacy. So what war are we talking about? This war is being played out worldwide almost daily between governments and individuals on what constitutes privacy.

This war is not so simple. California just passed a landmark privacy bill, and after the bill’s passage, one aspect that remains ambiguous is what constitutes the data that can be made private at the individual’s choice. We have an excerpt below, courtesy of The Wall Street Journal, by Marc Vartabedian, Georgia Wells, and Lara O’Reilly.

“One of the points of contention is likely to fall around the legislation’s definition of “personal data,” which includes broad categories such as biometric data, psychometric information, browsing and search history and geolocation data. The act’s current version states that personal information doesn’t include information that is publicly available or general enough to not identify an individual, a broad definition technology companies may lean on heavily to argue their collection of such data is justified.”

Thankfully, things are somewhat simpler in our field of planning for wealthy international families. By combining a trust and a properly structured PPLI policy, we can transfer beneficial ownership to the insurance company which creates a much welcomed benefit for families.

This is particularly true for those that reside in countries where the government is unstable or corrupt, or sometimes unfortunately both.  This issue raises real concern for the personal data of wealthy international families in the massive exchange of data now taking place under CRS.

In a recent letter to The Financial Times, Filippo Noseda, a partner at Mishcon de Reya LLP, gives us a startling example:

“In Argentina seven members of the Argentine tax authorities were arrested on February 2 for allegedly selling taxpayers’ information, showing the risks faced by citizens living in high-risk jurisdictions who for one reason or another have bank accounts abroad (Argentine police also seized $5m in cash, which gives a measure of the scale of data trafficking). Dissidents with foreign accounts will be particularly vulnerable to reprisals from their governments.”

Hiding in Plain Sight

What are the steps that allow an insurance company to become the beneficial owner of the assets inside a PPLI policy, and give clients a level of legitimate privacy not possible with other techniques?  Here they are:

  • The policyholder contributes the assets that he or she wants to protect as a premium payment, in cash or in kind, to a bespoke investment fund created by the life insurer. The life insurer opens a dedicated account at a custodian bank for the underlying assets of the policy.
  • The policyholder selects an investment strategy and nominates an investment manager. The life company formally appoints the investment manager.
  • This internal investment fund is exclusively linked to the policyholder’s life policy. The value of the PPLI policy is equal at all times to that of the underlying internal investment fund.
  • The life insurer has now become the Ultimate Beneficial Owner (UBO) of the underlying assets. In return for the premium payment, the policyholder has a “claim” on the life insurer for the value of the underlying investment fund.

This planning technique of using the insurance company as the beneficial owner of the assets in a PPLI policy is akin to what we learn in a 5th century text by Sun Tzu, The Art of War. This famous text teaches ostensibly about war, but its basic message is–avoid open conflict unless it is absolutely necessary.  A few key quotes from the book demonstrate this:

“The supreme art of war is to subdue the enemy without fighting.”

“If you know the enemy and know yourself, you need not fear the results of a hundred battles.”

“A good commander is benevolent and unconcerned with fame.”

This is precisely what we do in marrying a trust with a properly structured PPLI policy.  The result is what we call Expanded Worldwide Planning (EWP). By finding the best of what a trust and an a PPLI policy have to offer, we create this legitimate environment of enhanced privacy without a conflict with tax authorities in any jurisdiction worldwide. This is stealth that achieves a victory by study and superior knowledge.

Please bring us your privacy concerns, so we can construct a bespoke structure that fits the aims and goals of your family.

 

  ~ by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

 

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Your Pot of Gold Under the Rainbow

PPLI: Uses Non-Disruption to Achieve Disruption

Private Placement Life Insurance (PPLI Category in our blog) shares a key element with so-called disruptive companies–innovative efficiency.  This is expressed in the likes of companies such as Uber and Airbnb. Uber can be thought of as the world’s largest taxi service, but they own no vehicles.  Airbnb has been called the world’s largest hotel, yet they do not own hotel buildings.

They both offer a new approach to common needs: transportation and lodging services. PPLI offers just such a structure for wealthy international families–an efficient tax-free environment for their assets.

One outstanding difference between PPLI and disruptive companies is that PPLI uses what might be called a retro structure, life insurance. We can then also call it a non-disruptive structure that offers benefits that far exceed those of many planning techniques for wealthy international families. What are these outstanding benefits:

  • All assets inside the PPLI policy receive tax deferral, not only investments, but business income too.
  • The assets pass tax-free to the beneficiaries named in the PPLI policy. In a properly structured policy one creates a tax-free environment for these assets. Assets can be located anywhere in the world.
  • Because life insurance is used, FATCA and CRS reporting is greatly simplified, and in some cases, is eliminated.
  • Families receive enhanced privacy, because the insurance company becomes the beneficial owner of the assets inside the PPLI policy.
  • The PPLI structure provides excellent asset protection.
  • The PPLI structure is low cost with fees averaging 1% of assets.
  • The PPLI structure is fully compliant with the tax authorities of all tax jurisdictions.
  • Should an untimely death of the wealth creator occur, his family is protected with a tax-free PPLI death benefit.

A recent example from the financial world, which has similarities Uber and Airbnb, caught our attention this week, courtesy of The Wall Street Journal by Maureen Farrell and Liz Hoffman:

“Upstarts Crash Wall Street’s $7 Billion Capital-Markets Party”

Ex-bankers from Goldman Sachs, JPMorgan hang out shingles to advise companies on securities offerings

When Twitter Inc. TWTR -1.07% was looking to raise $1 billion from investors earlier this month, it put out the usual calls to Wall Street banks.

The social-media company also called Vijay Culas, who works out of rented office space on a busy stretch of highway in San Mateo, Calif.

A former Goldman Sachs GS +1.06% Group Inc. banker who hung out a shingle in 2014, Mr. Culas helped Twitter negotiate with its banks and ultimately sell a type of hybrid bond for a 1% fee, one of the cheapest offerings in recent memory.

Mr. Culas is among a handful of upstart advisers who are challenging investment banks on turf once thought impenetrable: the $7 billion-a-year business of handling complex stock-related transactions.

Our non-disruptive approach to planning for wealthy international families is expressed in our embrace of Expanded Worldwide Planning (EWP). In the Wikipedia page International tax planning, you will find both the history of EWP and its key elements.

We welcome your inquiries. Our worldwide staff is here to serve your planning needs.

Please contact us today to discuss your own unique situation.

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  ~ by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

 

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PPLI Hits the Mainstream with Bloomberg

EWP: A Giant Structuring Tool

Since we work with wealthy international families, we are expert in using Private Placement Life Insurance (PPLI) as a structuring tool. Our approach is called Expanded Worldwide Planning (EWP). A few weeks ago Bloomberg ran an article on PPLI, “How to invest in Hedge Funds and Pay No Taxes.” We offer quotes and a video about the article below.

First some basics on EWP, and how a properly structured policy can excellently serve the needs of wealthy international families.

  • All assets inside the PPLI policy receive tax deferral, not only investments, but business income too.
  • The assets pass tax-free to the beneficiaries named in the policy. In a properly structured policy one creates a tax-free environment for these assets. Assets can be located anywhere in the world.
  • Because life insurance is used, FATCA and CRS reporting is greatly simplified, and in some cases, is eliminated.
  • Families receive enhanced privacy, because the insurance company becomes the beneficial owner of the assets inside the PPLI policy.
  • The EWP structure provides excellent asset protection.
  • The EWP structure is low cost with fees averaging 1% of assets.
  • The EWP structure is fully compliant with the tax authorities of all tax jurisdictions.
  • Should an untimely death of the wealth creator occur, his family is protected with a tax-free death benefit.

More on Product vs. Structure

The Bloomberg article mentioned above speaks about PPLI as a product, which of course it is, but most importantly it is an EWP structuring tool. One quote from the article is of note:

“When I would talk about it years ago, people looked at you funny,” said Edward Gordon, founder of Preservation Capital Partners. Lawyers for the wealthy hadn’t heard of PPLIs and often dissuaded their clients from trying a product that “sounded too good to be true,” he said. Now, “it’s reaching somewhat of a tipping point.”

Unfortunately, the ignorance of PPLI’s planning possibilities even goes beyond lack of knowledge.  Many asset managers naively sell against insurance structuring, and do not realize that the unique tax advantages of PPLI will give the assets they manage a significant boost in performance.  This is especially true for long-term investments, and those intended for future generations.

Here are some other key quotes from the Bloomberg article by Heather Perlberg and Ben Steverman.

“This is a sexy product that people get excited about owning and tell their friends about,” said Aaron Hodari, a managing director at the advisory firm Schechter Wealth. “It’s an alternative investment that allows you to invest in hedge funds and defer or eliminate taxes.”

“Athletes, celebrities, and family offices are embracing private placement life insurance, or PPLI, as a way to preserve wealth for their heirs. It’s a strategy that’s perfectly legal and has existed for decades. While insurance funds are typically a way to protect assets from lawsuits, the main appeal of PPLIs is that they can help investors avoid taxes on capital gains, ordinary income and high-net-worth estates.”

Bloomberg’s Peggy Collins now offers us a short video about the Bloomberg article:

We invite you to explore with us the structuring possibilities of PPLI and EWP. As always, your comments and questions are indeed welcomed and appreciated.

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 by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

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Location Will Get You Everywhere

PPLI Elevates Your Tax Efficiency

In using Private Placement Life Insurance (PPLI) for tax efficient structures for wealthy international families, the location of the various elements in the structure is of vital importance.  If any one of these elements is out of position, the whole PPLI structure suffers.

Since the French Open tennis tournament is now being played, we will include a handy description of being out of position below.  For an example from the tax world, a matter from the new U.S. Tax overall was brought to our attention with a video from  Fox News, (Fox Business).  This video highlights the importance of location for the government entity who is collecting the tax.  In this example, a company moves its headquarters, thus, a change in the U.S. taxing authority on the state level.

Merely listing the various location elements in PPLI structuring shows us that we are putting together a complicated puzzle.  But once the last piece of this puzzle is successfully put in place, a powerful result takes place for the client.  We include our list at the end of our blog.

Take this example from a recent PPLI case.  A U.S. Green card holder who spent little time in the U.S., generated her income in a E.U. country through a BVI company. She was not a tax resident of this E.U. country, but wished to shield her substantial income from U.S. taxes.

A foreign non-grantor trust purchased a PPLI. We placed her business inside a holding company structure that was inside the PPLI policy. Now, instead of paying U.S. income tax, and being subject to U.S. estate tax, she was able to take tax-free distributions from the PPLI policy. Many different types of locations were involved here!

We now go to the French Open, where one of the coaches of Rafael Nadal, Francisco Roig, describes one way Nadal maneuvers his opponent out of position, for our example, please read location:

“It’s tougher to play him physically because he’s moving you much more than before,” Roig said. “He’s opening the court unbelievable with the backhand. Before, the backhand—against a right-handed player—was more in the middle. But now you have to run three or four meters more, and open the width in the forehand area. You are soon out of position and then he kills you again with the forehand cross court.”

Our quote is courtesy of Tom Perrotta of the Wall Street Journal,

“A Scary Thought at the French Open: Rafael Nadal Is More Efficient Than Ever.”

This is also our goal for international tax planning–to be more efficient than ever.

Before pondering our lists of location elements, we give you the Fox News video, highlighting the change of physical location of a major company in the NYC investment world.

We must consider the location of all these elements when we craft our structures:

  • the trust that usually owns the policy;
  • the trustee of the trust;
  • the insured or insureds on the policy;
  • the domicile of the insurance company;
  • the assets;
  • the holding company structures, if any;
  • the beneficiaries.

I am sure there are more, but these are the main ones that come to mind.  Please give us your thoughts, and thank you for your continued trust and support.

 

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 by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc

 

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A Great Dance Couple: EWP & Trust

“Dancing Cheek to Cheek”

The films of Fred Astaire and Ginger Rogers in the 1930’s and 1940s had some sensational dance routines.  The dance couple of Expanded Worldwide Planning (EWP) and a Trust are poised for equally sensational steps in the realm of planning for wealthy international families.

Our firm specializes in just this brand of choreography: using a properly structured Private Placement Life Insurance (PPLI) in combination with an excellently drafted Trust.  We capitalize Trust(s), because there is a large variety to choose from in international tax planning, and the selection depends on the nationality of the family members, their jurisdictions of domicile, the passports they carry, the location of their assets, and all the various countries’ laws that impact these items.

At the heart of EWP is a properly structured Private Placement Life Insurance (PPLI) policy. The assets inside this policy can be anything that can held by a trust company. These assets can also be located anywhere in the world.  While these assets are inside this PPLI policy, all tax is deferred.  At the death of the insured life/lives under the policy, these assets pass tax-free to the beneficiaries of the PPLI policy.

A trust can be used in connection with other planning to lessen taxes, but by itself does not automatically confer tax advantages. For example, a trust cannot pass assets as a tax-free death benefit to future generations, as a PPLI policy can do.

For those jurisdictions in the world that recognize trust, there are innumerable techniques used by wealthy international families that favor the use of a trust.

Many advisors who draft trusts miss the opportunity of “dancing cheek to cheek” by not incorporating PPLI policies in conjunction with their trust planning.

Trust and Insurance Comparison

●    Contractually based and used by millions ●    Provides some asset protection
●    Tax deferral ●    Sometimes seen as tool for the rich
●    Insurance company is beneficial owner ●    Requires “trustee” with full control
●    Simplified or limited reporting ●    More stringent reporting requirements
●    Potentially tax free ●    Tax filings for trust and possibly beneficiaries required in some jurisdictions
●    No capital gains tax ●    Limited or not direct tax deferral on payouts
●    No trustee  
●    Asset protection  

In most civil law jurisdictions, trusts are poorly acknowledged and trust law is not well developed. This can create obstacles for those domiciled in these civil law jurisdictions that have created foreign trusts. However, in certain circumstances, a PPLI structure can circumvent these problems and achieve the planning aims one would more commonly be able to fulfill with a trust in a common law jurisdiction.

Our well-rehearsed team of advisors can truly teach you some new dance steps, that partner EWP with trusts, so “Let’s Dance.”

 

 by Michael Malloy, CLU TEP, @ Advanced Financial Solutions, Inc